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Friday, December 05, 2008

Cheap Gas

As rapidly as it has fallen, the average pump price of unleaded regular gasoline in the US still has a ways to go, to end up lower on Barack Obama's Inaugural Day next January 20 than its inflation-adjusted level of $1.60 per gallon when Bill Clinton took office in 1993. However, it does seem likely to beat the adjusted $1.82 per gallon in effect when George W. Bush took the oath of office. The fall from its $4.11 peak in July is a classic good news/bad news story, with evidence of the latter showing up in several forms this week.

I can't recall when I've spent more time examining the data for US car sales, or for that matter when they have received more media attention. The November figures were simply awful, and not just for the Detroit Three that are pleading for life-support in Washington, DC. The sales of Toyota and Honda fell by slightly more than Ford's, compared to November 2007, with Nissan off by as much as GM. But contrary to the view that the summer's high gas prices were burned indelibly into the minds of consumers, "light trucks", the category that includes SUVs, recovered some of their lost market share for the month, accounting for 51.9% of all light vehicles sold, in contrast to their year-to-date market share of 48.5%. That might not be entirely attributable to low gas prices, though it struck me as significant that Honda's only model to post a sales gain for the month was their Pilot mid-sized SUV (EPA 18 mpg), while Toyota's popular Prius hybrid (EPA 46 mpg) fell by 48%, year-on-year. One month does not a trend make, but it's clear that sub-$2 gasoline negates essentially any financial benefit from expensive fuel-saving technology.

An interesting analysis of gasoline prices from the American Petroleum Institute puts today's prices in perspective. Despite the precipitous drop of the last several months, the average price for 2008 should still tie the previous annual, inflation-adjusted high of $3.277/gal. for 1981. That makes today's $1.81/gal. even more remarkable. While it looks typical or even high compared to most of the years from 1982-2002, it appears quite low in the longer historical context. The question facing consumers and policy-makers alike is whether future gas prices are more likely to resemble the first two-thirds of 2008 or the last third, once the economy recovers. Setting aside concerns about Peak Oil, which has receded from attention, lately, the period coinciding with the lower gas prices on API's chart featured a weak OPEC and steady non-OPEC oil production growth of around 1% per year. That looks unsustainable, even without the likely impact of $40 per barrel oil on new deepwater drilling and oil sands projects.

Nor is it clear how much more biofuels can contribute, at least in the next several years. US ethanol output already stands at roughly 10 billion gallons per year, the energy equivalent of about 400,000 barrels per day of crude oil. That's priced into today's oil balance. Getting beyond 15 billion gallons will require a large contribution from cellulosic ethanol technologies that are still at the demonstration scale, with the largest currently-operating facility producing only 1.4 million gallons per year--less than 100 barrels per day.

So if $1.80/gal. gasoline looks unsustainably cheap, what should we be planning for? Eyeballing the API's 1918-2007 gasoline price chart suggests the long-term average is pretty close to 1949's inflation-adjusted $2.43/gal. Coincidentally, that's consistent with the level implied by OPEC's notional "fair price" for oil of $75 per barrel. That's a problem, because $2.50 gas won't do much for the sales of the hybrid, plug-in hybrid, and all-electric cars that Congress and others are insisting the Detroit Three agree to build more of, in order to qualify for a federal bailout. Even a $50/ton carbon tax or cap & trade permit price for CO2 only gets us to $3.00. Without a lot more help than that, gas prices alone are not likely to deliver the anticipated contribution of fuel economy towards improved US energy security and reduced greenhouse gas emissions. That might just require convincing Americans that more efficient cars are justified by values, rather than mere value.